Member Article

Introduction: On February 7, 2021, the State Council Anti-monopoly Commission (the “Commission”) promulgated the Anti-Monopoly Guidelines for the Platform Economy (the “Guidelines”), following only three months after the State Administration for Market Regulation (“SAMR”) issued an exposure draft of the same on November 10, 2020 (the “Exposure Draft”), which unveiled a more rigorous approach to anti-monopoly regulation. The brief interval between the Exposure Draft and the finalized Guidelines demonstrates fully the importance the authorities have attached to anti-monopoly work in the platform economy.

In our November 12 article, The Way Forward: Anti-monopoly Guidelines for the Platform Economy, we put forward for reference our industry observations regarding the Exposure Draft. Comparatively, the Guidelines resemble the Exposure Draft in style and structure but also differ significantly with respect to certain content, which may impact regulatory policies going forward for platform economy undertakings. In this article, we analyze the key adjustments in the Guidelines in conjunction with our earlier observations.

The Guidelines confirm some of our earlier assumptions: the Guidelines refine provisions found in the Exposure Draft and reduce legal uncertainty, thereby helping platform undertakings to enhance their understanding of relevant policies, promoting the implementation of those policies, and facilitating the development of the platform economy. We therefore see a promising future for platform undertakings - undertakings simply need to properly understand the new policies and cooperate with regulators in implementing them.

In this article, we summarize the key adjustments in the Guidelines compared to the Exposure Draft in five aspects, basic principles, defining the relevant market, monopoly agreements, abuse of dominance, and concentrations of undertakings. In general, we find these adjustments take practical scenarios into sufficient account and are conducive to the innovative development of platform undertakings.

Abstract:

1. The Guidelines substantially modify the wording of basic anti-monopoly principles by adding expressions such as “preventing the disorderly expansion of capital” as mentioned at the meeting of the CPC Central Committee Politburo and the Central Economic Work Conference, and striking expressions such as “stay open and inclusive” and expressions used in regulatory policy for the new economy such as “stay inclusive and prudent.” From this, we understand anti-monopoly law enforcement will trend toward strengthening in the future, supported by detailed measures such as those specified in the Interim Measures for Administration of Subsidies for Anti-monopoly Work, promulgated by the Ministry of Finance.
2. The Guidelines further specify the methods for defining relevant markets in the platform economy by stipulating that relevant markets can be defined based on products on the platform, multiple relevant product markets can be defined respectively based on multiple related products on the platform, or multiple relevant markets can be combined into one market where the existing cross-platform network effects of a platform can impose sufficient competition constraints on platform undertakings. We expect regulators will have more flexibility in defining relevant markets in the platform economy in the future without struggling to consider which methods to employ. On this basis, the Guidelines do not contain a provision found in the Exposure Draft that would have permitted regulators to directly cite platform undertakings for abuse of dominance without first defining the relevant market in which the abuse occurred.
3. The changes in the monopoly agreement section are more akin to technical adjustments, of which two require particular attention. First, with respect to adjustments in horizontal monopoly agreements, the Guidelines specify that independent price-following behavior should not be regarded as a price cartel, so as to avoid undue interpretation of synergistic behavior that could result in disorder in the normal operation of markets. Second, the Guidelines specify the meaning of most-favored-nation treatment clauses (platform undertakings require business undertakings on the platform to provide the undertaking with transaction conditions equal to or more favorable than those offered to other competing platforms in terms of product price or quantity), and state that such clauses intersect with both vertical monopoly agreements and abuse of dominance.
4. With respect to abuse of dominance, the Guidelines retain the core content found in the Exposure Draft, such as the analysis framework for predatory pricing (below-cost sales), the “choosing-one-from-two” analysis framework, factors to consider when determining whether a platform constitutes an essential facility, and the prohibition on implementing different transaction terms based on big data and algorithms. It is particularly noteworthy that the Guidelines add two new bases to justify a platform undertaking selling below cost, which is intended to ease concerns over undertaking promotional activities, namely, “developing other businesses on the platform within a reasonable period of time” and “promoting the entry of new products into the market within a reasonable period of time.” Furthermore, the Guidelines identify data as a criterion to consider when determining whether a platform constitutes an essential facility and strikes content found in the Exposure Draft that could have deemed related data as essential facilities. In addition, the Guidelines also make appropriate adjustments to the definitions of “unreasonable transaction terms” and “differential treatment in transactions”.
5. With respect to concentrations of undertakings, the Guidelines retain reporting requirements for control agreement structures while continuing to emphasize that regulators will closely scrutinize acquisitions of start-ups and emerging platforms, acquisitions that are not notifiable due to the adoption of free or low-price policies, and acquisitions with high market concentrations but which result in small overall market scale. In addition, the following changes are subject to special scrutiny: in calculating platform turnover, the Guidelines add “playing a leading role” as a criterion when analyzing the platform’s turnover generating model; and, in terms of behavioral remedies, the Guidelines add data as a facility subject to open access and stipulate that concentrations of undertakings can be conditionally approved, including with commitments to compatibility and to no decrease in interoperability.

Key adjustments to fundamental principles

The Guidelines make significant adjustments to expressions of fundamental competition law principles. We believe the following adjustments warrant special attention:

First, the Guidelines add “preventing disordered capital expansion” into its fundamental principle. The principle of “preventing disordered capital expansion” has been referred in the conference of the CPC Central Committee Politburo and the Central Economic Work Conference successively held in December 2020, and “strengthening anti-monopoly and preventing disordered capital expansion” has also been stated as one of eight key tasks by the Central Economic Work Conference, demonstrating the determination of the State to strengthen anti-monopoly regulation, enhance anti-monopoly law enforcement, and promote capital to play the role of facilitating innovation and enhancing consumer welfare and public interests. In this respect, measures taken by the State include encouraging platform enterprises to pursue original and basic scientific and technological innovation by utilizing the advantages of data and algorithms. Correspondingly, the Guidelines delete the expression of “maintain a fair, open and inclusive development environment.” We predict that anti-monopoly law enforcement work will trend toward strengthening in the future, supported by detailed measures such as those provided for under the Interim Measures for Administration of Subsidies for Anti-monopoly Work.

Second, added to the Guidelines as their fundamental principles are “support the innovative development of platform enterprises” and “enhance international competitiveness”, indicating the intent of regulators to maintain a balance between strengthening domestic anti-monopoly law enforcement and enhancing enterprises’ global competitiveness. It should be noted that anti-monopoly law targets monopolistic practices rather than large-scale platform enterprises. Only if we properly control monopolistic practices can we ensure platform enterprises develop on the right track and gain innovative capacity and competitive strength. On the contrary, over-regulation may occur if anti-monopoly enforcement is isolated from specific monopolistic practices, which ultimately will hurt the innovation and competitiveness of platform enterprises.

Third, the Guidelines stipulate a strengthening of the overall planning and coordination between anti-monopoly law enforcement and industry supervision, indicating China’s emphasis on exercising coordinated supervision of monopolistic practices. Previously, the People’s Bank of China (PBOC) called for “overall coordinated supervision” in Article 64 of Regulations on Non-bank Payment Institutions (Draft for Comment), proposing that non-bank payment institutions engaging in monopolistic behaviors be jointly punished in accordance with relevant laws and regulations by the anti-monopoly enforcement authorities under the State Council and the PBOC. However, detailed rules for implementing this “joint-punishment” mechanism in practice still need to be explored by anti-monopoly and industry supervisory authorities. OECD pointed out in a publication entitled Relationship between Regulators and Competition Authorities that competition authorities generally take a firmer stance on protecting competition in various industries, have more knowledge of market competition, are more experienced in dealing with restrictive competitive practices, and are less likely to be deterred by the regulation of industry regulators. Therefore, anti-monopoly law enforcement authorities may need to properly integrate their own competition concerns with the concerns of industry regulators to avoid what OECD suggests could otherwise lead to the resource duplication or inconsistent, investment-discouraging application of two sets of policies^[1][2].

Key adjustments to the definition of relevant markets

The Guidelines substantially revise content concerning the definition of relevant market. Below, we analyze two major adjustments in this aspect:

First, the Guidelines further specify methods for defining relevant markets in the platform economy. The Exposure Draft proposed that the cross-platform network effect could define either an independent market or multiple relevant markets without further analyzing what methods would be used to define such markets. The Guidelines provide specific methods to be used to define relevant markets. Specifically:

1. Relevant market is defined based upon the products on the platform. For example, in reviewing behaviors of an online car-hailing platform that imposes transaction conditions on drivers, the relevant market may be defined merely based upon drivers by examining whether the platform has a market dominant position in the recruitment of drivers.
2. Where a platform involves multiple products, multiple relevant markets may be defined based on the relationships among the products or multiple relevant markets may be combined into one market where there is a strong cross-platform network effect. We discussed in our November 12 article that the U.S. Supreme Court decided a credit card antitrust case in 2018 that ruled on whether a “two-sided platform” should be defined as one or two relevant markets with respect to cardholders and merchants^[3]. In that case, whether monopolistic behavior could be substantiated, exempted, or justified rested upon how the relevant market was defined. Similarly, this conclusion will vary substantially if we use different methods of defining the relevant market when we examine whether monopolistic behavior has an effect on consumers.
3. As mentioned above, the Commission raises the restrictiveness of “cross-platform network effects” as determinative of whether there is one or multiple relevant markets. This idea echoes a proposition the U.S. Supreme Court put forth in its 2018 decision, in which the court ruled that “indirect network effects” determine whether or not a platform is considered a “two-sided transaction market.” “Indirect network effects” is similar in meaning to “cross-platform network effects,” with both providing that the value of a platform to customers on one side depends on the number of customers on the other. Judging from the practices of other jurisdictions, credit card organizations would generally be held as platforms subject to significant cross-platform network effect. In contrast, the “newspaper-advertising” two-sided market would generally be considered subject to less cross-platform network effect, because the readers of newspapers do not care about the quantity of advertising on the other side of the platform, so the cross-platform network effect can only affect the one side of the platform.

In addition, the Exposure Draft mentioned the concept of “attention competition,” proposing a possibility of incorporating platforms with different principal businesses into one same relevant market (for example, that social networking platforms and video platforms be incorporated into one relevant market due to the existence of attention competition). However, the concept was struck from the Guidelines, indicating that attention competition will not be considered a factor in defining relevant markets, but may merely be used to analyze market power once the relevant market has been defined.

Second, the Guidelines do not contain a provision found in the Exposure Draft that would have allowed regulators to directly identify abuse of dominance practices without defining the relevant market, provided certain conditions were met. As we mentioned in our November 12 article, this provision would have helped to reduce law enforcement difficulties in certain cases, but its application would have needed to satisfy a series of conditions, such as proving “the monopolistic behavior is proven by the sufficient and direct evidence; conduct that is possible only if market dominance has lasted for a long time and has produced obviously harmful effects,” and the relevant conditions would have required further refinement. In fact, the Federal Trade Commission and Department of Justice explicitly puts forth in its Horizontal Merger Guidelines that “[law enforcement] analysis need not start with market definition^[4]” and many scholars have also proposed more straightforward approaches to competition analysis — the problem is that we still lack a universally applicable, reliable, and widely accepted economic tool in practice. We believe the Guidelines have fully considered the feasibility of this issue in practice.

Nevertheless, as we have pointed out in our November 12 article, the Supreme People’s Court indicated in a 2013 judgment that “the relevant market need not be explicitly and clearly defined in certain abuse of market dominance cases … Even if the relevant market is not clearly defined, the regulator may still assess the market position of the undertaking and the possible market impact of the alleged monopolistic behaviors by examining direct evidence of exclusion or restriction of competition.” Therefore, while the relevant provisions were struck from the Guidelines, there still remains the possibility that regulators may still not clearly define the relevant market in some abuse of dominance cases in practice.

Key adjustments for monopolistic agreements

We understand that adjustments in monopoly agreements are akin to technical adjustments compared with adjustments in fundamental principles and in the definition of relevant markets. We believe the following adjustments warrant special attention:

First, in terms of horizontal monopoly agreements, the Guidelines specify that independent price following does not constitute a price cartel. This provision clarifies the status of price following as a normal competitive behavior in the market economy, so as to avoid over-interpreting the scope of concerted actions that would affect ordinary commercial decisions. It is important to note that “data” is also specified as a means by which to engage in concerted actions. We understand “data” here to refer to the exchange of data. However, it would be difficult to prove that there exists price following conducted out of independent expressions of will when sensitive information is exchanged between competitors and those competitors engage in this practice in concert, even if they have not directly communicated their intent to take concerted action.

Second, the Guidelines clarify the meaning of the most-favored-nation treatment clause when it is used in the platform economy, pointing out that the clause cuts across both vertical monopoly agreements and abuse of market dominant position. Meanwhile, the Guidelines strike the term “most-favored-nation treatment clause” and emphasize review of form of acts of the business undertakings. Indeed, in addition to the most-favored-nation treatment clause, other clauses in vertical monopoly agreements may also involve vertical monopoly agreements and abuse of dominance, because most abuse dominance behaviors involve the conclusion of relevant agreements. In other words, if platforms engage in acts that involve both vertical monopoly agreements and abuse of dominance, they may still be held to violate relevant vertical monopoly agreement provisions even if they are found not to have engaged in abuse of dominance for lack of dominant market position. Possible scenarios include:

1. The first scenario is the enterprise occupies a market share that is greater than the market power standard but is lower than the market dominance standard. For example, the European Commission, in paragraph 26 of the Guidelines on the Application of Article 81 (3) [101 (3)] of the Treaty [Establishing the European Community]^[5], notes that enterprises may occupy less market share to reach an illegal vertical agreement than to engage in abuse of dominance as stipulated in Article 102 of the TFEU. We believe that competition authorities in the European Union would hold that an undertaking that has 30% or more market share could still be deemed to have illegally concluded a vertical agreement even if it does not have a dominant market position, based on provisions of the Vertical Block Exemption Regulation that stipulate only a 30% market share exemption standard for vertical agreements. Similarly, in China, the Anti-monopoly Guidelines on the Automobile Industry also provide a 30% market share standard for vertical, geographic, and customer restrictions, which may be of great reference value for undertakings in other industries when they design most-favored-nation treatment clauses or other vertical agreement clauses.
2. The second scenario involves cumulative monopolistic effects. The Anti-monopoly Guidelines on the Automobile Industry describe “cumulative monopolistic effects” as “most or even all undertakings in the relevant market have all adopted similar vertical monopoly agreements, and a vertical restrictions network which fully covers the entire relevant market has been formed thereupon.” Where there exist cumulative monopolistic effects, undertakings may still be identified as being in violation even if their market share is relatively low (even lower than the 30% market share standard as mentioned above).

Third, in the provisions applicable to hub-and-spoke agreements, the Commission retained for regulators the flexibility to potentially apply either Article 13 or 14 to platform undertakings. In the future, we need to observe how relevant provisions of the Guidelines will be adjusted if Article 17 is retained in the current revision draft of the Anti-monopoly Law of the People’s Republic of China, which would prohibit business undertakings from organizing and facilitating the conclusion of monopoly agreements.

Key adjustments in abuse of dominant market position

With respect to the abuse of market dominant position, the Guidelines retain core content such as the analysis framework for predatory pricing (below-cost sales), “choosing-one-from-two” analysis frameworks, factors to consider when determining whether the platform constitutes necessary facilities, and prohibiting the implementation of different transaction termsbased on big data and algorithms. Many adjustments in this area involve technical adjustments, including supplementing factors to consider when determining existence of market dominant position, adjusting circumstances that constitute abuse of the market dominant position, and providing more justifications for below-cost sales. Of these adjustments, we believe the following warrant particular attention:

First, the Guidelines add two justifiable reasons for predatory pricing, namely, “attraction of new customers within a reasonable period of time” and “carrying out promotion activities within a reasonable period” - both are common business practices taken by platform companies in market competition, indicating the Commission has considered relevant business practices.

Second, it is controversial in business circles as to whether data can constitute essential facilities, as studies of data are still in their initial stages. The Exposure Draft failed to resolve this controversy, although it stipulated general rules for identifying essential facilities to be used when examining whether data constitutes essential facilities. In this area, the Guidelines adopt a flexible approach by taking data as one of the considerations for determining whether a platform constitutes an essential facility, while striking provisions on identifying data to constitute an essential facility. Similarly, the Anti-monopoly Guidelines on Intellectual Property Rights in Article 16 struck references to “essential facilities” that were mentioned in its exposure draft, so as to avoid disputes over this issue by avoiding defining whether intellectual property rights can constitute essential facilities.

Third, with respect to attaching unreasonable transactions terms, the Guidelines impose limitations on the scope of “compulsory user information collection” as referenced in the Exposure Draft, by making it clear that information prohibited from collection refers to “unnecessary” user information, thus avoiding excessive regulation by regulators. Meanwhile, the Guidelines clearly prohibit platforms from attaching unrelated transaction procedures and service items in dealing with users, which are common unreasonable terms that many platforms implement in practice.

Fourth, with respect to differential treatment, the Guidelines strike the provision in the Exposure Draft that would have prohibited platforms from “implementing transaction prices or other transaction terms differentiated for old and new transaction counterparties based on big data and algorithms.” In our opinion, this adjustment is reasonable because: (1) it is a common practice for platform enterprises to provide preferential treatment to new customers within a reasonable period of time (not limited to the first transaction the new customer concludes). Therefore, the Exposure Draft faced criticism for being too harsh for defining this practice as illegal, although violations could have been exempted if the platform could prove such practices were implemented for justifiable reasons; and (2) the practice “implementing transaction prices or other transaction terms differentiated for old and new transaction counterparties based on big data and algorithms” is covered by situations of differential treatment as listed in the first paragraph, “[i]mplementing differentiated transaction prices or other transaction terms based on big data and algorithms and according to the financial strength, consumption preferences, user habits, etc. of the transaction counterparties.” Nevertheless, platform enterprises still need to note the “reasonable period of time” criterion so as to avoid being deemed to implement differential treatment based upon big data or algorithms.

Key adjustments to concentrations of undertakings

In terms of concentrations of undertakings, the Guidelines retain the core content of the Exposure Draft, such as mandatory declaration of control structure agreements, and stressing that regulators shall pay close attention to acquisitions of start-ups and emerging platforms, acquisitions that are not notifiable due to free or low-price policies adopted by undertakings and acquisitions that result in a high market concentration but a small market size. Adjustments in this area are basically technical improvements in terms of consistency, completeness and accuracy, and wording. Of those adjustments, the following warrant special attention:

First, regarding the platform turnover calculation, the Guidelines further specify that the turnover of platform enterprises includes sales income and service fee. With respect to the calculation of sales income, the Guidelines divide platforms into two circumstances, i.e., the platforms participating in the market competition on one side of the platform (e.g., self-operated stores) and platforms playing a leading role in the transaction. Although the Guidelines do not specify what circumstances constitute “play a leading role in the transaction,” we understand leadership forms when platform enterprises can decide the transaction terms for the platform side, such as online car-hailing platform.

Second, the Guidelines categorize data as facilities and stipulates that regulators may conditionally approve concentrations of undertakings by ordering open data access. In addition, the Guidelines add “undertaking of compatibility or not reducing the level of interoperability” as a behavioral condition upon which concentrations of undertakings may be conditionally approved, whose main purpose is to prevent owners of facilities from excluding third parties by technical means.

Conclusion

Compared with the Exposure Draft, the Guidelines present substantial technical adjustments and improvements. In addition, the Guidelines also strike certain substantive content that is subject to debate and improve relevant provisions according to commercial practices so as to further reduce legal uncertainty and promote the understanding of platform enterprise regulatory policies. Despite this, there remain many issues for regulators to further clarify and we expect detailed measures to be promulgated in relevant competition policies and in enforcement practice. We believe that the implementation of the Guidelines will promote the healthy development of the platform economy in China.